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Procurement Perpectives: Prior dealings and procurement

0 81 Government

by Stephen Bauld

Newspapers have a field day when it comes to "novelty purchasing transactions" when councils view them as a good idea and vote to give it a try.
Procurement Perpectives: Prior dealings and procurement

These novel transactions (or transactions that are organized or otherwise packaged in a novel manner) have a very bad history of serious dispute and other problematic results.

I strongly recommend that when you see one of these great new P3 (public-private partnership) ideas to purchase new construction, using concepts never used in North America, stop and ask questions.

I have seen many different ways to buy construction services in the United States and some are very good, but do your homework first before you move forward with the project.

To give you one reported Canadian example: in the mid-1990s, the City of Cranbrook, B.C. decided to use a P3 approach in building a multi-purpose recreational complex (projected to cost more than $20 million), which would incorporate a hockey arena, swimming pools and other facilities.

The goal was to keep the debt related to the facility off the city's books. It signed a 30-year agreement covering the design, build, lease, operate and eventual transfer of the facility with KeenRose Technology Group.

Under that contract, it was agreed that the private financing rate was not to exceed 7.25 per cent.

However, securing such financing proved to be difficult. Construction began in October 1999 after the financing was obtained. The city provided the land and leased back the aquatic centre for $800,000 per year.

There was a variable revenue guarantee of $700,000 and the operator was guaranteed the first $142,000 of its costs. KeenRose assumed the risk associated with the operating costs of about $1.5 million and guaranteed the capital cost of the facility at $22.6 million.

The following year, KeenRose was purchased by Cinergy Corporation, which formed a separate subsidiary, Vestar, to manage the complex.

Under the operation agreement, the city was allocated 1,500 hours per year of arena time, with the balance available to Vestar to sell at $125 per hour. In 2001, the mayor announced a further 10.9 per cent tax increase linked to a $500,000 construction cost overrun at the multiplex.

In October 2001, Vestar complained that its costs were higher than anticipated and its revenue lower.

For example, revenues from concerts and special events were far below projections.

Faced with Vestar's weak financial position, the city agreed to cover revenue shortfalls beyond $140,000.

In 2002, the city auditor decided to include the $22 million lease on the city's financial statements, resulting in a substantial decrease in the city's borrowing power. After dealing with legal disputes, cost overruns and construction delays, five years after the project began, the P3 arrangement was terminated.

Vestar withdrew in 2004 after paying $1.7 million to take ownership of the complex.

Since that time, P3s have come a long way in working out all the problems related to this example. However, this is only one example of novelty government procurement projects that have gone sideways. I could write another book of examples closer to home in relation to great ideas that have taken a very bad turn.

The point being, as a member of staff or council, it is your responsibility to look at every new procurement process, to determine if it works for your municipality.

Too many bad ideas have been pitched to council that sounded like a good idea and turned out to be a disaster.

To be safe on future new construction, I would advise you look at any and all of procurement methods in use. Government procurement is not treated like private sector procurement.

Negotiation of these types of deals that fall out of line with your own bylaws can be very costly for everyone.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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